A family-run café near a railway station is considering selling fresh lunch boxes to commuters. The owner needs $4 500 for a refrigerated display unit and i...
Question 1 Report
A family-run café near a railway station is considering selling fresh lunch boxes to commuters. The owner needs $4 500 for a refrigerated display unit and initial ingredients. The café has only traded for six months, so it has little retained profit. A relative has offered a short-term loan with no interest, while the owner could also use a bank overdraft. The owner is concerned because revenue changes each week and employees must still be paid on time.
(a) Define the term overdraft. [2]
(b) State one reason why an overdraft may be useful when the café has a temporary cash-flow problem. [1]
(c) Calculate the amount left to finance if the owner invests $1 700 of personal savings. [2]
(d) Analyse one risk to the café of using a short-term source of finance to buy the display unit. [1]
Answer Details
(a) An overdraft is permission from a bank to withdraw or spend more than is in an account, up to an agreed limit. [2]
(b) It gives flexible access to cash and can cover a short, temporary cash shortage. [1]
(c)
\[\$4\,500-\$1\,700=\$2\,800\]
The remaining finance requirement is \(\$2\,800\). [2]
(d) The refrigerated display unit is a long-term asset, but short-term finance may need repayment quickly. This could create a cash-flow problem while the café is still paying wages and buying ingredients. [1]
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